Term
| Goal of Financial Management |
|
Definition
Maximize the CURRENT value per share of the company's stock
OR
Maximize the market value of the existing owners' equity
--this is a goal that encompasses both profitability and controlling risk
--no ambiguity and no long-run vs short-run issue
NOT:
max profit, min costs, max market share (buy companies more valuable than they cost) |
|
|
Term
| The Agency Problem: relating to large companies with multiple stockholders (too many to please) |
|
Definition
people making the firm decisions are NOT owners of the firm. (stockholders hire agents to make decisions)
agency problem--conflict of interest between this relationship between the stockholder and their hired agent (higher price vs. lower price) |
|
|
Term
| Corporate Finance is the study of the relationship between ___ and ___ |
|
Definition
| the study of the relationship between business decisions and the value of the stock in the business |
|
|
Term
|
Definition
incentives that can be used to align management and stockholder interests--make sure these are structured carefully to reach mutual goals
For example: don't tell them just to sell it, they will only look for the sale not getting you the best price. Offer commission or pay per lawn mowed as opposed to how much money an hour--they may just take longer to do less work |
|
|
Term
|
Definition
| watching Managers to see that they're doing their job correctly |
|
|
Term
| Secondary markets (NYSE, AMEX, NASDAQ) are important because: |
|
Definition
| shareholder value, how liquid investments are ( more liquid, easier to share) |
|
|
Term
|
Definition
| capital through public offering (stock); issued SOLEY by corporations |
|
|
Term
| cash flows to the firm consist of |
|
Definition
|
|
Term
| Initial Public Offering (IPO) |
|
Definition
| firm begins selling the shares to the public |
|
|
Term
| Corporate form of the organization (primary advantages) |
|
Definition
ownership can be transferred quickly and easily, money can be raised more readily.
both are enhanced by the existence of financial markets |
|
|
Term
| Dividends and debt payments are paid to |
|
Definition
| the financial markets to creditors and shareholders |
|
|
Term
| Purpose of a financial market |
|
Definition
| brings buyers and sellers together (just like any market) to buy and sell debt and equity securities |
|
|
Term
| differences of financial markets |
|
Definition
| types of securities traded, how it is conducted, who the buyers and sellers are |
|
|
Term
| Primary vs Secondary Financial Markets |
|
Definition
Primary--refers to the original sale of securities by governments and corporations
Secondary--securities are bought and sold after the original sale |
|
|
Term
|
Definition
| issued by both governments and corporations (equities are only by corporations) |
|
|
Term
|
Definition
Seller: corporation
transaction raises money for the corporation
2 types of transactions: public offerings and private placements (involving a specific buyer) |
|
|
Term
|
Definition
involves one owner or creditor selling to another
transferring ownership of corporate securities
still important to corporations, but they are not directly involved (investors are willing to purchase securities in a primary market when they know they can be resold) |
|
|
Term
| Balance sheet provides the ___ value |
|
Definition
book value of the assets, liabilities and equity
it is a SNAPSHOT of the firm; what it owns, owes, and the difference between the two (equity) |
|
|
Term
|
Definition
the price at which the assets, liabilities or equity can actually be bought or sold
This value is more important to the decision-making process |
|
|
Term
| Book Value vs Market Value |
|
Definition
because of GROWTH VALUE, assets on balance sheet (book value) can differ from what it's worth today
TO UNDERSTAND THE IMPACT OF REPORTED GAINS AND LOSSES
Example--Lebron James' Balance Sheet at age 17 doesn't reflect his future HUMAN CAPITAL
it is very difficult to reflect future value and growth options on a balance sheet
Market value is more important because it is the money we can gain or need to give up |
|
|
Term
|
Definition
current assets: has a life of less than one year--will be converted to cash in within 12 months. (inventory, cash and accounts receivable [money owed to the firm by its customers])
fixed assets: tangible; a relatively long life such as a truck or intangible such as a trademark |
|
|
Term
| Liabilities and Owners Equity |
|
Definition
liabilities are current or long-term, same reasonings as assets.
current are listed before long-term
long-term liability is something like a loan that will be paid off in x years
OWNERS EQUITY--difference of assets and liabilities--if a firm were to sell all its assets and use the money to pay off its debts, what would remain would go to the stockholders. |
|
|
Term
|
Definition
bond--long-term debt
bondholders--long-term creditors |
|
|
Term
|
Definition
difference between a firm's current assets and current liabilities
positive when current assets exceed current liabilities (meaning the cash available over the next year will exceed the cash owed over the same time period)
--healthy firm |
|
|
Term
| Finding the value of the firm can be found through... |
|
Definition
| market value--the balance sheet and book value don't show the value because it has no connection between total assets and value of the firm since the assets are recorded at cost |
|
|
Term
|
Definition
expenses shown on the income statement are based on this principle:
first determine revenues as described previously and then match those revenues with the costs associated with producing them (realized at the time of sale) |
|
|
Term
| accounting income can differ from cash flow because |
|
Definition
an income statement includes NONCASH ITEMS (depreciation).
these expenses charged against revenue to not directly affect cash flow
(purchase something for $5,000, so there is a $5,000 cash outflow at the time of purchase, but instead of deducting it as an expense they may depreciate the asset over a five-year period)--deducting $1,000 per year instead of $5,000 immediately
in other words: cash flow was deducted immediately when it was purchased, but not on the income statement. |
|
|
Term
|
Definition
| money that came in minus the money that went out |
|
|
Term
|
Definition
cash flow that results from the firm's day-to-day activities of producing and selling.
all numbers come from the income statement
EBIT + depreciation - taxes
TELLS US; if the cash inflows from business operations are sufficient to cover its everyday outflows. |
|
|
Term
|
Definition
money spent on fixed assets minus money received from the sale of fixed assets.
can be a negative if the firm sold more than it purchased
same as CAPEX
numbers come from balance sheet and income statement:
ending net fixed assets - beginning net fixed assets + depreciation |
|
|
Term
|
Definition
firms invest in both current and fixed assets.
numbers come from the balance sheet
ending NWC - beginning NWC |
|
|
Term
| Cash flow from assets has two equal equations |
|
Definition
Cash flow to Creditors + Cash flow to Stockholders
must equal
Operating Cash Flow - Net Capital Spending - Changes in NWC |
|
|
Term
|
Definition
comes from the balance sheet and income statement
interest paid (income sheet) - net new borrowing (balance sheet) |
|
|
Term
| cash flow to stockholders |
|
Definition
comes from bs and is
dividends paid (is) - net new equity raised |
|
|
Term
| Ratios are useful because |
|
Definition
they facilitate comparisons through time or between companies
they are used internally and externally |
|
|
Term
| When looking at ratios, ask: |
|
Definition
what is it trying to measure
why is that information important/what does it tell you
need a context for ratios to be valuable (past and competition performance) |
|
|
Term
| Categories of Financial Ratios |
|
Definition
tell how fast, efficiency; managing its operations
1. short-term solvency or liquidity ratios
2. long-term solvency or financial leverage ratios
3. asset management or turnover ratios
4. profitability ratios (change assets to profits)
5. market value ratios |
|
|
Term
|
Definition
the value the market is giving their earnings--every earning
if you increase earnings by one dollar, market value goes up by (the answer)
if below 1, too high, above not high enough
answer says that the shares sold for x times per earning or that they "carry" a multiple of 8 |
|
|
Term
| Comparing PE Ratio and Market-to-Book ratio shows: |
|
Definition
shows if the company is fast-growing
if below 1, too high; if above not high enough |
|
|
Term
| Evaluating Financial Statements: Internal Uses |
|
Definition
performance evaluation--compensation and comparison between divisions
planning for the future--guide in estimating future cash flows |
|
|
Term
| Evaluating Financial Statements: External Uses |
|
Definition
creditors--pay back money
suppliers
customers--company around to service warranty
stockholders--future capital |
|
|
Term
| Ratios are not helpful by themselves so they need |
|
Definition
|
|
Term
|
Definition
Time-Trend Analysis--used to see how the firm's performance is changing through time
(internal and external uses)
Peer Group Analysis: Compare to similar companies or within industries |
|
|
Term
| Potential Problems of Ratios |
|
Definition
no underlying theory, so there is no way to know which ratios are most relevant
benchmarking is difficult for diversified firms
globalization is difficult
FIFO vs LIFO |
|
|
Term
|
Definition
total equity divided by the number of shares outstanding
reflects historical costs
compares market value of the firm's investments to their cost
a value x < 1 could mean that the firm has not been successful overall in creating value for its stockholders |
|
|
Term
| PV (increases/decreases) when r increases |
|
Definition
| decreases--the greater return, less you have to put away today |
|
|
Term
| Fv (increases/decreases) when r increases |
|
Definition
| increases--grows faster with bigger return, so there is more money in the future |
|
|
Term
| PV (increases/decreases) when t increases |
|
Definition
| decreases--the more time to grow, the less money you need to put away today |
|
|
Term
| Fv (grows/declines) when t increases? |
|
Definition
| grows--more time, more money to accumulate |
|
|
Term
| Why do we need to calculate equivalent cash flows at different times? |
|
Definition
| A dollar today does not equal a dollar tomorrow. We can't add money values in different time periods. We must calculate equivalent values at the same time to add them. |
|
|
Term
|
Definition
| the excess of cash revenues over cash outlays in a given period of time (money coming in, money going out) |
|
|
Term
|
Definition
| current value of one or more future cash flows, discounted at some appropriate interest rate |
|
|
Term
|
Definition
| value to which a specific cash flow or series of cash flows will grow on a given date in the future |
|
|
Term
|
Definition
| rate paid (or received as a creditor) on borrowed money, expressed as a percentage of the sum borrowed (indicates HOW FAST MONEY WILL GROW) |
|
|
Term
|
Definition
Interest paid only on the original principal, not on the interest accrued
interest for 1st year $50, uf using simple interest the 2nd year will only use the principal in the calculation and not the interest |
|
|
Term
|
Definition
Interest computed on the accumulated interest as well as on the original principal (includes interest on interest)
we want to use compound interest |
|
|
